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Money fund assets surpass $3.5 trillion

August 14, 2008|Tom Petruno | Times Staff Writer

'Better safe than sorry" has been the motto of many an investor over the last year. One of the biggest beneficiaries of that cautious mind-set has been the money market mutual fund industry.

This week, assets in money funds crossed the $3.5-trillion mark for the first time, according to Money Fund Report in Westborough, Mass. Investors added a net $22.4 billion in the seven days that ended Tuesday, lifting total assets to a record $3.52 trillion, according to the newsletter.

Year to date, money funds have taken in a stunning $437 billion. Stock mutual funds, by comparison, have had net cash outflows this year. Stock funds held $5.8 trillion in assets as of midyear.

Nobody's getting rich off money funds: The seven-day average annualized yield on taxable funds is a mere 1.84%, down from 4.76% a year ago. Yields have plunged as the Federal Reserve has slashed its benchmark interest rate, in turn driving down returns on the short-term corporate and government IOUs that money funds own.

Although they don't pay much, the funds offer relative safety of principal. I used the word "relative" because, unlike insured bank deposits, money-fund holdings aren't guaranteed. But shareholders have assumed -- correctly, so far -- that if there is a danger of a loss of principal, a fund's management company will use its own capital to support the portfolio.

Over the last year, a number of fund companies have stepped in to ensure that their money funds' share values stayed constant at $1. Some of the funds had owned short-term debt that suddenly plunged in value in the credit crunch. The funds' management firms bought those securities from the portfolios to remove any threat of principal loss.

"By stepping in when they have, the companies have kept the comfort level up" for investors, said Connie Bugbee, managing editor of Money Fund Report.

By contrast, some customers of Pasadena-based IndyMac Bank and other failed banks this year found out the hard way that the government's insurance limits on deposits are set in stone: If you're over the limit and the bank goes under, your money is in jeopardy.

Still, even money fund investors are playing it safer.

The fastest-growing money funds this year are those that restrict their holdings to U.S. government securities, such as Treasury bills. Assets of those funds now total $924 billion, up 19% since the start of the year, compared with a 14% gain in assets for the industry overall.

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tom.petruno@latimes.com

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On latimes.com

Money & Co.

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